Tuesday, August 07, 2018

Securities Regulation Daily’s top 10 developments for July 2018

July saw a number of significant developments taking place that will set the tenor for the legal and regulatory environment in both the long and short terms. Let’s get to it!

Notably, President Trump chose D.C. Circuit Judge Brett Kavanaugh to replace retiring Supreme Court Justice Anthony Kennedy. While the securities bar may focus on the nominee’s track record on cases involving separation of powers and administrative law judges, commercial speech, corporate governance, SEC enforcement, and private securities suits, a major partisan battle continues to brew over the judge’s confirmation.

Matters involving virtual currencies and technology also loomed large. In a widely followed administrative determination, the SEC again rejected the Winklevoss’ Bats BZX Exchange bid to launch an exchange traded fund based on Bitcoin. Meanwhile, members of the House Ag Committee questioned an A-list group of witnesses about the appropriate oversight of new assets in the digital age. FINRA had some questions of its own as it solicited comments on the provision of data aggregation services, supervision of artificial intelligence use, and the development of a machine-readable rulebook.

The month also saw additional efforts towards further regulatory streamlining advances. In one instance, the House of Representatives passed a package of securities and banking bills that will make it easier for smaller companies to raise capital funds. Also, in July the SEC proposed rule amendments to further streamline debt offering disclosures. Meanwhile, Deutsche Bank affiliates settled an SEC enforcement action for nearly $75 million in connection with mishandling certain “pre-released” ADRs.

Things are also shaping up over at the CFTC. Commissioner nominee Dan Berkovitz testified before the Senate Agriculture Committee with flying colors. The full Senate will consider his confirmation in the near future, as well as that of Dawn Stump. During the month, CFTC Chairman J. Christopher Giancarlo again appeared before House Agriculture Committee, providing a periodic update on derivatives-related issues, including the increasingly precarious status of the existing U.S.-E.U. agreement on regulating derivatives clearinghouses and the proper role of the CFTC.

Last, but not least, the careful structuring of an “Up-C” combination by the fiduciaries over at Earthstone Energy carried the day in a legal tussle with a company stockholder, insofar as the Delaware Court of Chancery was concerned.

As summer heads into its final stretch, Securities Regulation Daily will continue bringing all the legal and regulatory news for the financial markets fit to print. As always … stay tuned.

President Trump tapped D.C. Circuit Judge Brett Kavanaugh to replace retiring Supreme Court Justice Anthony Kennedy. The nomination is pivotal because it is widely expected to alter the balance on the Supreme Court which, in recent years, tended to rely on Justice Kennedy’s vote to resolve some high-profile cases. While many will focus on Judge Kavanaugh’s views on issues such as reproductive rights (See, e.g., Garza v. Hargan (Kavanaugh, J., dissenting), remanded on mootness grounds, Azar v. Garza, June 4, 2018, per curiam), securities practitioners may look instead to Judge Kavanaugh’s business law cases to discern his views on a range of issues, including separation of powers and administrative law judges (ALJs), commercial speech, corporate governance, SEC enforcement, and private securities suits. See our full coverage.

2. VIRTUAL CURRENCIES—SEC rejects listing of Winklevoss bitcoin ETF

The bitcoin derivatives markets are not large enough to permit an exchange-traded fund, the SEC suggested in rejecting an exchange’s bid to list shares in the Winklevoss Bitcoin Trust. Bats BZX Exchange, Inc., failed to convince three members of the Commission that its surveillance-sharing agreement with the Winklevoss twins’ Gemini Exchange was sufficient to prevent fraud and manipulation, as required by the Exchange Act. Dissenting, Commissioner Peirce argued that allowing the product to be listed would help ameliorate the majority’s concerns about manipulation by helping to stabilize the bitcoin market (Release No. 34-83723, July 26, 2018). See our full coverage.

The House Agriculture Committee heard from a diverse panel of prominent blockchain thought leaders in a hearing titled “Cryptocurrencies: Oversight of New Assets in the Digital Age.” The witnesses included virtual currency entrepreneurs, academics, an attorney, and a government regulator, all seeking to shed light on the promise of digital assets and the regulatory challenges associated with these novel products. At the hearing’s onset, Committee Chairman Michael Conaway (R-Tex) identified one of the core issues under consideration observing, "Perhaps no question has generated greater uncertainty than how to determine if a particular token is a security. We generally know what to do if a commonly traded asset is deemed a security—we apply the securities laws. And if it is not a security, there is a good chance it’s a commodity and subject to the requirements of the Commodity Exchange Act." See our full coverage.

FINRA is soliciting comment on financial technology and innovation, particularly in connection with the provision of data aggregation services, supervision of artificial intelligence use, and the development of a machine-readable rulebook. The request is part of FINRA’s Innovation Outreach Initiative and related efforts to seek broader feedback regarding how FINRA rules and programs could be modified to facilitate fintech innovation without negatively affecting the integrity of the markets. "We also hope to learn about any potential areas of innovation that would benefit from a greater focus on investor protection safeguards," said FINRA President and CEO Robert Cook. See our full coverage.

The House passed a comprehensive capital formation package dominated by titles that would significantly revise securities regulations but which also contains numerous titles on banking, consumers, and combatting human and drug trafficking. The JOBS and Investor Confidence Act of 2018 (S. 488), also known as JOBS Act 3.0, is the product of a bipartisan compromise aimed at making it easier for smaller companies to raise capital. The legislative package, passed by a vote of 406-4, was added to a Senate-passed vehicle, so the House version will have to go back to the Senate for further action. See our full coverage.

The SEC has proposed rule amendments designed to streamline financial disclosure requirements applicable to registered debt offerings for guarantors, issuers of guaranteed securities, and affiliates. The amendments to Regulation S-X Rules 3-10 and 3-16 would focus on the materiality of information in the required disclosures and making them easier for investors to understand, with an eye toward reducing compliance burdens (Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, Release No. 33-10526, July 24, 2018). See our full coverage.

In his nomination hearing before the Senate Agriculture Committee, prospective CFTC commissioner Dan Berkovitz emphasized his commitment to ensuring that the agency’s regulatory program continues to work for the producers, distributors, and consumers that rely on the futures and swaps markets to manage their price risks and discover prices for agricultural and other commodities. He also noted that the CFTC must adapt its regulatory program to respond to new markets and conditions and must examine existing regulations to determine whether they continue to serve their intended function in the most efficient and effective manner. Nominated by President Trump in April, Berkovitz served as the CFTC’s general counsel from 2009 to 2013. See our full coverage.

In an oversight hearing of the House Agriculture Committee, CFTC Chairman J. Christopher Giancarlo gave updates on derivatives issues, including the increasingly precarious status of the existing U.S.-E.U. agreement on regulation of derivatives clearinghouses and the proper role of the CFTC and other agencies in regulating cryptocurrencies and blockchain. Giancarlo also discussed other issues including LIBOR and proposed position limits rules. See our full coverage.

By carefully structuring an "Up-C" combination with Bold Energy to conform to the framework laid out in Kahn v. M&F Worldwide Corp. (Del. 2014), Earthstone Energy fiduciaries secured the benefit of the business judgment presumption and shook off a stockholder lawsuit. The Delaware Court of Chancery did not need to determine whether Earthstone’s largest stockholder was a controller because business judgment deference applied, even at the pleadings stage on the motion to dismiss (Olenik v. Lodzinski, July 20, 2018, Slights, J.). See our full coverage.